A debt deal, but still plenty of fiscal uncertainty

August 1, 2011

President Obama says the debt ceiling and budget deal will “begin to lift the cloud of debt and the cloud of uncertainty that hangs over our economy.”  But only begin, and just barely. Consider the following questions (via IHS Global):

1)  We do not know whether the bipartisan committee of lawmakers will be able to come to an agreement, what that agreement will contain, or whether its recommendations will be accepted by Congress.

2) We do not know whether the automatic sequester would really be allowed to kick in if the committee fails. We do not know whether the Bush tax cuts will be extended in whole or in part.

3) We do not know whether the temporary payroll tax cut and emergency unemployment insurance benefits will be extended into 2012.

4) We do not know what shape a permanent deficit fix would take—one that addresses entitlements and revenues and goes well beyond even what the committee is charged with producing.

What is the nightmare scenario? It is unfortunately rather easy to construct a nightmare scenario involving another collision with deadlines at the end of 2012. Suppose that the bipartisan committee fails. That will mean that automatic sequester will be due to kick in on January 1, 2013. That is exactly the same day that the Bush tax cuts are scheduled to expire. So the result of political gridlock would be a massive fiscal contraction on January 1, 2013. The political landscape at that time would be in a state of flux anyway, because the new Congress would not yet have taken office, and the president might be a lame duck. To make the picture even messier, another (contested) increase in the debt-ceiling would be due at around that time.


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